Free Markets, Free People

Economy

Economic Statistics for 1 Dec 11

Today’s economic statistical releases:

Today’s chain-store results do NOT confirm the widespread anecdotal reports of a strong Black Friday week, trending at a same-store year-on-year 2.5%.

Initial jobless claims rose 6,000 to 402,000 in a short Thanksgiving week, which clouds the results.

The Bloomberg Consumer Comfort Index remained steady at -50.2 compared to the previous -50.1.

The ISM Manufacturing Index rose to 52.7, and many of the sub-indexes rose sharply, a good sign for the economy.

Construction spending rose 0.8% last month, which is nice, even though it’s rising from an extremely depressed base.

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Dale Franks
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Economic Statistics for 30 Nov 11

Today’s economic statistical releases:

The Mortgage Bankers Association reports that mortgage applications were down by -11.7%, but the short Thanksgiving week clouds the significance of this week’s results. Delving deeper into the report shows new purchase applications were down -0.8% while refinance apps fell -15.3%.

The Challenger Job-Cut Report shows layoff announcements are fairly steady this month at 42,474 compared to 42,759 in October and 48,711 last year.

ADP, the country’s largest third-party payroll processor, estimates private payrolls rose 206,000 in November. We’ll see if Friday’s Employment Situation confirms that.

3Q productivity and costs were revised downward slightly, with productivity increasing at 2.3% annually, while labor costs fell -2.5%. This is pretty much in line with the GDP revision for 3Q.

The Chicago PMI indicates a pickup in business activity for the Chicago area, with the index rising to 62.6 from 58.4. This report is widely seen as a predictor of the national PMI, which will be released tomorrow.

The National Association of Realtors reports their pending home sales index rose to 93.3 from 84.5.

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Dale Franks
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“Kicking the can” in a cul de sac

Or maybe a better analogy is Nero and Rome.  Politicians and hard decisions just don’t seem to mix very well do they?  It is much better to be Santa Clause than the Grinch.  Especially if you want politics to be your career.

Maybe that’s the problem.  If you remember correctly, at least in the US, politics was supposed to be a part-time job.  But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.

And here we are.

In Europe, it has, as predicted for decades, finally reached a tipping point.  And the political elite?   They really have no idea how to handle the problem (and the same sort of problem is becoming evident here).  So they resort to the usual reaction of politicians caught in an uncomfortable situation.  Defer a decision:

Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.

The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.

If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week?  Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:

Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris.  Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move.  That’s a really tall order.  Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country.  I’m told that this is about standard.  And that’s just one of the many barriers to movement between countries.

It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege.  The bond buyers have to ask the same thing.  At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.

McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways.  The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in.  The second is rhetorical and reflecting a belief that it can’t.

Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic.  If you want to see a real “Domino Effect”, let Europe collapse.

Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%

And that sound you hear?   The can clinking along as politicians the world over do what they do best.

MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.

You can read more about how these swaps work here.

~McQ

Twitter: @McQandO

Economic Statistics for 29 Nov 11

Today’s economic statistical releases:

The Conference Board’s consumer confidence index jumped sharply upwards, from 39.8 to 56, mainly on employment optimism.

Distress sales and foreclosures seem to be pushing the housing sector deeper into contraction. The S&P Case-Shiller home price index fell again, -0.6% for the month, and -3.6% for the year. On the other hand, the FHFA  reports housing prices rose 0.9% last month, though they’re still down -2.2% on a year over year basis. But, the FHFA only reports on conventional loans or those bundled by government agencies—which often has price caps. Case-Schiller is far more broad, and the FHFA picture is probably missing a lot of trouble in the housing sector.

The State Street Investor Confidence Index rose 2 points to 97.2 from a revised 95.2 last month, as institutional investors became a bit more jaunty.

Finally in retail sales, Redbook reports a year-over-year jump of 5.4% in sales last week. ICSC-Goldman is also strong, with sales up 1.7% for the week, and up 4% over last year.

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Dale Franks
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Krugman has it all figured out: Tax the Rich

Yes, Paul Krugman has a novel idea that no one has previously thought of … we can get out of this mess we’ve spent ourselves into by taxing the rich.

And by the way, income inequality now makes that both feasible and acceptable:

About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

Because you know, “super-high-income individuals” don’t deserve to keep the money they earned, because, well, we’ve gotten ourselves in this awful mess and we need someone to bail us out.

And they have a lot of money, by gosh.  A lot of money.  So “it wouldn’t be hard to devise taxes” that would take most of it on the marginal side.  Because again, we should have first claim when we get ourselves in trouble.  Besides, they have more than enough money and they should pay their “fair share”.

A couple of reminders.  Despite what Krugman says, taxing the top 0.1% isn’t going to make a significant difference.  And even if it did, it would only make that sort of difference once.  The next year, that money would be much less available.  Which would probably mean what?

Well “rich” would have to be redefined, wouldn’t it?   Maybe then it would be the top 1%, because we all know they have more money than they need and they should pay their fair share, right?

As a reminder, the Adjusted Gross Income necessary to be considered a one-percenter is a ‘rich’ $343,927.  And this particular percentage of tax payers are indeed shirking their fair share.  After all, they only pay 36.73% of all income tax collected now.   Surely we can kick that up to, oh I don’t know, at least 50%.  And, of course “we” can, certainly.   For a short time, that will indeed bring in more revenue.  But, again, once the marginal rate goes up those being stuck with the tax bill will go to work finding ways to minimize that hit.   And, they will.

Which means those top 5% suddenly become vulnerable, etc.

A short version of the Krugman solution can be found working so well in Europe right now.  And E21 does a good job of reminding us of Krugman’s unadulterated enthusiasm for the social welfare states to be found there.  E21 also does a great job of eviscerating Krugman’s arguments concerning Europe’s problems:

Paul Krugman insists that the European debt crisis has nothing to do with excessive government spending.  The problem, to him, is a failed monetary experiment that deprives nations like Greece and Italy of the ability to print money to inflate away excessive debts.  The need to create an alternative understanding for the origins of the debt crisis is only natural given the extent to which the current crisis has tarnished the statist ideology that Krugman generally follows.  But his basic claims are nonsensical, as is Krugman’s citation of Sweden and Germany as economic role models.  While these economies have performed relatively well through the crisis, it was because they abandoned Krugman’s preferred economics and moved in a more market-oriented direction long-ago.

He was wrong about Europe and he’s wrong about taxes.  He’s become an economic joke but just doesn’t know it yet.  He’s a one-trick pony who, much like the global warming alarmists, ignores the fact that what he continues to claim is viable and necessary is constantly and consistently being trashed by reality.

The only good news is he remains a source of entertainment.   It’s sort of like a game.  You wonder how long he can go before reality actually grabs him by the scruff of the neck and makes him recognize the error of his ways (my bet?  Never happens).   And, as a bit of side fun, you wonder how long the NY Times will continue to let Krugman push his reality challenged agenda forward before they finally (and, of course “reluctantly”) can him (see first bet – they haven’t a clue).

~McQ

Twitter: @McQandO

Economic Statistics for 28 Nov 11

It’s a heavy week for economic statistics, culminating in the Employment Situation on Friday, but we start the week off light:

New home sales rose 1.3% in October. That’s a solid gain, but the total of 307,000 was a bit below expectations.

The Dallas Fed general business activity index rose to 2.3 from -14.4., its first positive reading in six months.

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Dale Franks
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How can government help the economy? End the corn ethanol subsidy

The fixation of government on “alternate fuels” and its use of taxpayer money to subsidize some of them is, at least in one case, having a very negative effect on markets.  Again we have government market intrusion to hold responsible for rising food prices in an era of high unemployment and economic turmoil.

Again, this is Econ 101 stuff.  For a government so full of experts who feel they have the right (based one assumes, in their superior intellect … or something) to decide what we should be using for fuel rather than letting markets decide, they sure have screwed this one up.

Corn is a major food crop.  And, for the most part, markets have kept corn relatively cheap and plentiful.  Enter government and the mandate that ethanol be produced and mixed with gasoline in an effort, one supposes, to reduce the amount of oil consumed.

The result, however, has been to drive up the price of corn and the price of other commodity foods instead. 

Here’s how it works.  The set up:

Powerful agribusiness interests collect a 45-cent-per-gallon tax credit to convert this food crop into ethanol, an unnecessary and sometimes harmful additive to gasoline. Another 54-cent-per-gallon tariff is imposed to keep Brazil’s sugar-cane-based ethanol from entering our shores. Nor does the folly end there. The Food and Energy Security Act of 2007 mandates a massive increase in the production of ethanol by 2022 even though there is no demand.

While there’s no demand, there’s plenty of your money to be had.  And what do producers react too?  Incentive.  So what provides the best return on investment right now?   Corn.  Not for the consumer, but for the producer.  So what do producers of other commodity foods do?  They switch from growing wheat and soybeans to corn.   The result is inevitable:

The lure of free government money reduces the amount of corn available for other uses, primarily as feed for animals. This has a cascade effect, increasing prices down the food chain and for crops unrelated to corn. Farmers might switch from growing, say, soybeans, to corn to get hold of the extra subsidy. That makes soybeans scarcer and drives up their cost. This year, the price of wheat has increased as farmers have switched to corn to take advantage of high corn prices. In either scenario, the price of food increases, and that’s the last thing we need right now.

When the price of feed grain increases, what do you suppose happens to the price of meat?

Want ethanol?  Feel it is a necessary and good thing?   Drop the mandate, drop the subsidy and drop the tariff.   Let the market decide.  If it actually does what its champions claim and actually provide an additive to gasoline that increases performance (a dubious claim at best) and lessens our dependence on oil, that ought to be an easy idea to sell.

The fact is, without the subsidy and the mandate, the market would most likely reject ethanol completely.  And that would conflict with the ideologically driven agenda that our government has put in place – namely it has the responsibility to decide what we should or shouldn’t use to power our vehicles.  Each administration has its own take on how this should be done but make no mistake, this has been something which has survived both Republican and Democratic administrations.

It is another, in a long line of examples, of government intrusion, market distortion and wasting taxpayer money for a product with no demand.  It also has the effect of driving up prices in food in an era of high unemployment.  It is a disastrous policy and the proof is in the distorted markets.

Time to end the whole program and rescind the foolish government mandate.  The effect?  Food prices would again react to market pressures instead of government mandates.   And taxpayer money wouldn’t be used to distort those markets any longer.

Win win as I see it.

~McQ

Twitter: @McQandO

Will Eurobonds Work?

(Originally posted at Risk and Return)

I have been skeptical and so is James Bianco:

The problem in Europe is simple – they created a common currency – the euro. For years, the market erred. It thought that meant that every sovereign debt had the same rating as Germany. I was buying Greek bonds. I was buying Irish bonds. I was buying Italian bonds. But I thought I was buying German bonds. Then, a couple of years ago, I had an epiphany – no, I was not buying German bonds; I was buying Greece, Italy, and Ireland, or whatever, not Germany.

Those countries, recognizing that they could borrow into infinity because everybody thought they were lending to Germany, pretty much did that and expanded their welfare states to the point where they cannot pay their debts.

Germany has disappointed everybody with its intransigence, its unwillingness to “get with the program,” and endorse massive ECB bond buying and Eurobonds. Their reason? They believe they will be stuck with the bill. Of course, they are right, they will be:

If a Eurobond market comes with with strict discipline/rules on borrowing and paying debt back, it might work.  Unfortunately no one will agree to a Eurobond market with strict discipline/rules.

If a Eurobond market comes with no discipline/rules, then it is just another way to trick the market into thinking they are buying German Bunds.   It will “work” for a while as the crisis will ease until everyone borrows too much money and then comes back much worse.

I am not even sure it will work more than a few days at this point, but maybe. Either way it is not a solution, but a stop gap at best. It is also a stop gap that should not be attempted unless an actual endgame is in sight:

So how do you fix the Euro crisis?  Unfortunately there are only three solutions and all are distasteful:

  • Call off the union and go back to legacy currencies.  This destroys the banking system who will be paid back with devalued/nearly worthless currencies.
  • Massive austerity.  This option is very unpopular among the electorates and will cause a bad recession/depression.
  • Fiscal union.  This is a nice way of saying Germany finally wins WW2.  Is the rest of Europe now ready to take orders from Berlin?  Didn’t they fight two wars to prevent this?

The only reason ECB printing keeps being mentioned is because the three options above are untenable and money printing is the only other thing they can think of.  Money printing does NOT fix anything, it just makes the problem better for a while until it comes back worse than before.

This dovetails with my analysis in The German Dilemma that their are no good options from the German perspective, and in fact fiscal union is far more problematic than commonly realized:

Full Fiscal Integration: Since all other solutions put in place circumstances that are unstable and merely kick the can down the road, the fundamental flaw in the Euro needs to be addressed. That is the lack of a unified fiscal policy. The answer then is the end of sovereignty, the creation of a US of Europe. An obvious objection is that Germany wants to be a sovereign nation. We’ll skip this niggling little detail, but even if they didn’t want to remain sovereign do they want to harmonize laws and economic policy with Greece and some of the other PIIGS? West Germany just  integrated with East Germany and the experience was traumatic featuring massive transfers to East Germans. The PIIGS will still not be competitive with Germany. That means internal adjustments (internal devaluation or austerity) to allow them to become more competitive for the PIIGS’ or massive transfers. Thus unifying the Eurozone under a single fiscal policy means massive transfers from Germany to the PIIGS to harmonize the welfare states and unify the debt and avoid austerity throwing the entire Eurozone into depression. Germans will pay for the debt in one fashion or another.

Cullen Roche points out that in the US we don’t worry much about the need for internal transfers between states to keep the system sound.  Today that is true, though it has led to large conflicts in our past, playing a role in civil unrest, uprisings, the conquest of a continent and near destruction of its former inhabitants and the Civil War. Our unity was easier to envision and still born of blood and tragedy.

I am not saying unification of Europe would lead to such tragedies and conflicts. However, we need to ask if Germany (or really all the countries) want to make the internal transfers that make such a system work? Germans would pay a great deal, Greece and the other PIIGS would suffer internal austerity to the extent that they contribute to the economic re-balancing. Do Europeans, or most importantly the Germans, view themselves as a people who will be responsible for paying all the bills to integrate the Greeks and others?

Are Europeans ready to think about their home countries in the same way Texans think of Texas? Their state, but completely subordinate to the US? Will they be able to secede? We answered that question in the US with a war of incredible savagery and destruction. My guess is a unified Europe would be far less stable. They will not choose a civil war comparable to the US, but instead countries leaving over time as well as never entering the union. That leaves us with all the problems we have now still being there. Without a European populace overwhelmingly in favor of a true union this will not work. We would be faced with a PIIGS like crisis with every election and the possibility of secession in each of the former countries.

The necessity of creating a union where there is no possibility of secession, where citizens are more loyal to the European sovereign entity than their own countries is incredibly unappreciated. Half measures will not work. If Texas were to get upset about staying in our own Union it would not matter how overwhelmingly popular the idea of leaving was in the Texas legislature, the US military will ensure that Texas stays a subordinate state. We decided that issue in 1865 at the cost of well over 600k casualties.

If a similarly firm enforcement of Eurozone union is not agreed to (and setting aside a war to force union) then why should the market assume the system will remain intact? Why consider the bonds issued by the various states, or the Eurozone as a whole, deserve a AAA rating?  My belief is that eventually the Eurozone will suffer other crises as states face local elections that wish to leave for one reason or another. Critically Eurobonds and fiscal Union make it easier for countries to leave, since the debt will be the Eurozone’s, not theirs. They can leave and stick the remaining members with the bill. That is an incentive which virtually ensures instability.

Treaties don’t matter if there is no enforcement mechanism, and all enforcement mechanisms at the end of the day have to have a credible belief in military force behind them to matter. Otherwise those who wish to exit can just thumb their noses at whoever stays behind. Has there ever been a successful union where the underlying members could leave? Not that I am aware of.

There are no good options, only more or less realistic ones.

Economic Statistics for 23 Nov 11

Today’s economic statistical releases:

The Mortgage Bankers’ Association reports that mortgage applications fell -1.2% in the Nov 18 week, with purchase apps up 8.2%, but re-finance apps down -4%.

Weakness in the transportation sector led durable goods orders down -0.7% last month, but up 7.5% from last year. Ex-transportation, orders were up 0.7% for the month, and 11.7% for the year.

Personal spending and income both rose last month, with spending up 0.1% and income up 0.4%. On a year-over-year basis, income has risen 3.9$, but spending rose faster, at 4.7%. The Price Index rose by 0.1% for the month, and 1.7% year-over-year.

Initial unemployment claims rose to 393,000 from last week’s revised 391,000. The 4-week average fell from 396,750 to 394,250.

The Bloomberg Consumer Comfort Index was -50.1 last week, from -50 a week earlier. The index has hovered at -50 for 9 weeks.

The Reuters/University of Michigan Consumer Sentiment index fell slightly, to 64.1 from 64.2 last period.

Manufacturing growth in the Kansas City Fed’s district eased slightly, with the KC Fed Index falling from 8 to 4. Future expectations remained solid, though.

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Dale Franks
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OWS: Let’s disrupt Black Friday

For a group trying to garner support from the public, this is the grand daddy of all bad ideas:

Some demonstrators are planning to occupy retailers on Black Friday to protest "the business that are in the pockets of Wall Street."

Organizers are encouraging consumers to either occupy or boycott retailers that are publicly traded, according to the Stop Black Friday website.

The goal of the movement is to impact the profits of major corporations this holiday season.

It’s one of those “it sounded good on paper” ideas that fall flat upon execution and, in fact, ends up being detrimental to the group trying to pull it off.  

How many stores have Black Friday Sales?   A lot more than there are protesters.   And what are these stores?  Private property.   So what do the stores have every right to do?  Eject those from their property who are being disruptive.  That, of course, will result in a cacophony of unfounded claims that the protesters “rights” have been violated.  

Meanwhile, who do you suppose will not be impressed?  Any potential supporters who also enjoy Black Friday deals and are inconvenienced by these boobs.

As for impacting corporate profits this holiday, seriously?  They couldn’t if they tried.  They don’t have the numbers and besides there are literally millions of outlets and ways to do shopping on Black Friday to include on-line.

This is simply another in a long line of tantrums by those who Billy told us about in his post the other day. 

We have two generations that have been raised to believe that, ultimately, someone else is responsible for the essentials of their lives. They believe they are supposed to retire in their fifties or early sixties, with a pension followed by Social Security. They believe they are supposed to relinquish concern for healthcare costs when they turn 65. They believe that if things get bad enough in their lives, unemployment, and later welfare, will keep a roof over their head and food on the table. They’ve been trained to believe this by a ruling class that has been assuring them since the 1930s that they have the fundamental right to a soft life.

They’re the folks who think money simply exists (or grows on trees), belongs to the government and should be doled out according to need and that it is the evil corporations who run the world.

So they come up with brilliant ideas like this.

Here’s a partial list of those companies these yahoos want to see occupied or boycotted (parenthetical remarks theirs):

– Abercrombie & Fitch

– Amazon.com (yes, we have to stay away from Amazon, too!

– AT&T Wireless

– Burlington Coat Factory

– Dick’s Sporting Goods (I was surprised, too!)

– Dollar Tree

– The Home Depot

– Neiman Marcus

– OfficeMax

– Toys R’Us

– Verizon Wireless

– Wal-Mart

I wonder if this means they can’t use their AT&T and Verizon phones that day to communicate and coordinate?  Of course, only some of those companies will have Black Friday sales (yeah, Home Depot is a hot spot for shoppers on the Friday following Turkey Day).  The list is only an example with the group calling on OWS to hit all publicly traded companies. 

They toss in this little disclaimer too:

"Keep in mind that we are not occupying small businesses or hardworking people—we must make a distinction between the businesses that are in the pockets of Wall Street and the businesses that serve our local communities.

We are NOT anti-capitalist. Just anti-crapitalist.

Ye gods … save us from the economically challenged and politically unhinged.  Clever, no?

No.

Enjoy Black Friday and be sure to hit some of the stores mentioned above.

~McQ

Twitter: @McQandO